Do US companies benefit from inflation?

Almost every 2 out of 3 large public companies in the US reported higher earnings this year compared to the same period in 2019.

Many of the largest public companies in the United States have reported higher profits compared to the pre-pandemic period, which raises many questions about the reality of this inflation and what it means for American companies.

In a report in the Wall Street Journal,Wall Street JournalAmerican writers Christine Broughton and Theo Francis say that companies are paying higher wages to their employees, spending more on materials and absorbing recorded shipping costs, which raises economic inflation measures, and many companies have reported record profits.

The authors note that after decades of low costs and prices, executives are seizing the once-in-a-generation opportunity to raise prices to match and, in some cases, outpace their higher expenditures, industries in the retail, manufacturing and biotechnology sectors have seen soaring profits. In contrast, some other industries are still faltering, especially in sectors that are still weathering the repercussions of the shutdown or burdened with inflationary costs.

Data from the FactSet platform indicates that almost every two out of 3 major public companies in the United States reported higher profits this year compared to the same period in 2019 – that is, before the outbreak of Covid-19 – and that about 100 A giant company that achieved profit margins in 2021 that is at least 50% higher than the figures recorded in 2019.

“This environment is unprecedented,” says Glenn Rictor, chief financial officer of International Flavors and Fragrances. “We have probably not seen such inflation in 30 years.” Rictor added that the spread of inflation makes it easier to discuss price hikes with customers.

The inflation rate in the United States reached its highest level in 31 years last month (Reuters)

high profits

In fact, profit margins often rise with inflation, and the risk in this case to companies is to raise prices at a faster rate than their competitors or in a way that exceeds the capacity of customers, which leads to the loss of sales and market share that may take years to recover, and the risk that lurks The economy lies not only in persistently rising prices, but also in persuading customers that further increases are inevitable, spurring inflationary demand in a vicious cycle.

Inflation last month hit a 31-year high, Americans spending on a range of essential products and services, including food, gas, rent and furniture, and the consumer price index in October rose 6.2% from a year ago. For its part, the Biden administration stressed that inflation is temporary, and linked the increasing costs to the repercussions of the epidemic on supply chain disruptions and labor shortages.

In response to a frequently asked question about whether prices will fall by next fall, Treasury Secretary Janet Yellen said – last Sunday on the “Face the Nation” program on the US CBS network (CBS) – that “it depends. Really on the epidemic, it is the main influence on the economy and inflation,” she said, adding that if the level of labor and demand returns to normal, prices may “return to normal” sometime next year.

However, some economists believe that inflation may persist in the next few years, and entrenched inflation means that Fed officials may have to raise interest rates sooner or more than they expected, which could dampen growth.

According to Gregory Dako, chief economist at Oxford Economics, the consultancy, “The stronger the economy, the more companies try to capture a larger share of the market, and if the companies have central weight in the market and strong demand, they will have the ability to raise the prices”.

Economists and executives say that higher prices are not the only factor that increases profits. Great demand for many types of goods – including computers, cars and luxury goods – has been a major driver of economic growth and rising corporate profits, and with the increase in the size and spread of fixed costs such as Rental and Equipment Most businesses make more profit with every sale.

demand strength

Parag That, a strategist at Deutsche Bank, believes that the starting point lies in the strength of demand, and although some parts of the economy are still lagging behind – including entertainment, transportation, restaurants and hotels – 3 quarters of companies ranked according to the index ” The S&P 500 belongs to industries where the rate of production far exceeds the rate recorded during the outbreak of the epidemic, thanks to the increased demand, which has enabled companies to raise prices.

Ametek, a manufacturer of industrial tools for aerospace, medical and other companies, explains that the increase in prices enables it to offset expenses caused by supply chain disruption and labor shortages this year, and Ametek’s operating profit margin rose to 23.4% until Now this year, compared to 22.8% in the first nine months of 2019, the company said profit margin growth would have been higher had it not been for its recent acquisitions.

In fact, not all companies were able to raise prices fast enough to keep pace with the inflationary pressures. Carrier’s profit margin fell to 8.7% this year, compared to 11.9% recorded in 2019, despite raising prices 3 times, and Carrier explains the decline in the margins. profit due to its split last year from United Technologies, and the company expects to consider additional price increases before the end of the year.

Dako – from the consultancy Oxford Economics – warns that there is some evidence that demand is slowing, and the desire of consumers and companies to absorb the rise in prices may slow with it. He believes that once supply constraints and shifts in consumer spending are eased, companies’ ability to raise prices will weaken further.

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